UAE withdraws from monetary union

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UAE to withdraw from the GCC common currency
No official justification was
given
Lack of convergence trades suggests market impact should be limited

UAE walks away
Events
The UAE state news agency reported today that a senior official from the UAE foreign ministry said that the UAE has decided to withdraw from the Gulf Monetary Union. The central bank governor added that the UAE would keep its currency pegged to the US dollar and monetary policy would remain the same.

Implications
The withdrawal of the UAE is a serious setback for the prospects of the Monetary Union. The UAE is the second largest economy in the Gulf Cooperation Council (GCC) and holds great prominence in the region. With the UAE’s decision to withdraw, it now leaves four out of the six GCC countries to enter into the single currency. Oman decided to withdraw from the very beginning. Therefore, it remains questionable as to whether or not this will proceed.

No official comments have been made to justify the decision. However, there were growing concerns in the UAE over the dominance of Saudi Arabia in the GCC common currency area. Different GCC countries were expected to host different institutions. However, with the GCC secretariat already based in Saudi Arabia and with the decision to host the GCC central bank in Saudi Arabia as well, UAE concerns intensified. This led to the UAE expressing its reservations over the decision in public, shedding doubts over the prospects of the common currency. The decision to walk away should therefore not come as a big surprise.

We estimate that UAE trade with the rest of the GCC is about 10% of total trade. The common currency agenda was mainly led by politics rather than economics. Hence, the economic cost of the UAE’s withdrawal should be limited.

Market impact
Markets were not convinced that the introduction of a common currency was imminent. Convergence trades never kicked off. We, therefore, believe that market impact will be limited. It is also important to note that the central bank governor mentioned that the currency will remain pegged to the USD. Not joining the common currency will give the UAE greater flexibility to manage its currency in the future. However, given the current economic downturn, we do not believe that currency reform is high on the agenda at the moment.END